Aramco exemption bends London IPO rules to limit

A worker shelters from the rain as he passes the London Stock Exchange in the City of London at lunchtime October 1, 2008. REUTERS/Toby Melville

LONDON (Reuters Breakingviews) - Where does an 800 pound gorilla sit? Anywhere it wants to. The old joke also applies to giant companies such as Saudi Aramco. The UK regulator has proposed changes that would make it easier for the state-controlled oil group to offer its shares in London. But making policy for a single company – especially one this large – is a mistake.

Under the current rules, it would be almost impossible for Aramco to obtain a “premium” listing in London. For example, almost every transaction between the company and its controlling shareholder – in this case, the Saudi government – would have to be approved by independent investors. Hard to imagine a group that is effectively an arm of the state countenancing this. Aramco could choose a second-class “standard” London listing with fewer restrictions but that is hardly suitable for what may become the world’s most valuable company.

So the UK Financial Conduct Authority has come up with a compromise: a new “premium” listing category especially for state-owned groups. These would be subject to all the usual rules, with three big exceptions. First, transactions with government owners would not need investor approval. Second, controlling shareholders would face fewer legal restrictions, such as the requirement that independent directors be vetted by external investors. Third, the category would be open for companies that have a primary listing elsewhere.

The workaround at least ensures Aramco would not be part of the FTSE 100 Index – one of the main objections to the proposed listing. Indeed, one interpretation is that the FCA is creating a category for Aramco that offers few of the benefits of a full London listing but sounds better than the other options.

Yet UK investors who decided to buy Aramco shares would face greater risks, and enjoy fewer protections, than with other large companies. It’s striking that a regulator that has spent years holding investors’ hands should conclude that, in this case, they are able to look after themselves.

Attracting Aramco would be a big endorsement of UK capital markets as Britain prepares to leave the European Union. That’s something the FCA, which is required to keep markets clean while also ensuring that London remains competitive, cannot ignore. Nevertheless, a willingness to opportunistically stretch the rules does not bode well for post-Brexit regulation.

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